CIPSED ProjectCIPSED ProjectState University of Gorontalo [UNG]State University of Gorontalo [UNG]

Entrepreneurship ToT Training ProgramEntrepreneurship ToT Training Program

1CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment &Risk Management

Canada-Indonesia Private Sector Enterprise Development [CIPSED] Project

Module 7 Revised: Feb. 3-2011

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Contents: Risk Assessment/Risk ManagementContents: Risk Assessment/Risk Management

CONTENTS:1. NOTHING HAPPENS IN LIFE WITHOUT SOME FORM OF RISK ATTACHED2. WHAT IS THE ULTIMATE RISK?3. RISK DETERMINANTS4. COMPONENTS OF RISK5. RELATIONSHIP BETWEEN RISK DETERMINANTS AND RISK COMPONENTS6. RISK ANALYSIS7. MANAGING RISK8. RISK ANALYSIS CHART FOR YOUR BUSINESS

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Purpose: Risk Assessment/Risk ManagementPurpose: Risk Assessment/Risk Management

• RISK: “TO BE EXPOSED TO THE CHANCE OF LOSS OR INJURY.”

• RISK: “IS A PERVASIVE PART OF ALL ACTIONS.”

• LIFE REQUIRES CHOICES: “CHOICES ALWAYS INCLUDE RISK.”

DECISION TREE: BASIC RISK PARADIGM […BOTH ACTIONS MAYBE BE RISKY; RISKY ACTIONS MAY HAVE MORE THAN TWO POSSIBLE OUTCOMES].

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RISKY ACTION

Chance of Gain

Chance of Loss

GAIN OUTCOME

LOSS OUTCOME

SURE OUTCOMESure action

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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What is the Ultimate Form of Risk?

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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Not only can RISKS not be avoided, the majority seek RISKS in at least some aspects of their lives.

RISK DETERMINANTS:

WHAT DETERMINES THE RISKS YOU FACE?

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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RISK DETERMINANTS:

WHAT DETERMINES THE RISKS YOU FACE?

A LACK OF CONTROL

A LACK OF TIME

A LACK OF INFORMATION

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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WHAT ARE THE COMPONENTS OF RISK?

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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WHAT ARE THE COMPONENTS OF RISK?

MAGNITUDE OF LOSS

CHANCE OF LOSS

EXPOSURE TO LOSS [Availability of a Choice]

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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MAGNITUDE of Potential Loss

CHANCES of Potential Loss

EXPOSURE to Potential Loss

LACK OF CONTROL•Natural Forces•Human Forces•Insufficient Resources•Insufficient Information•Insufficient Time

Cannot affect size of potential loss

Cannot affect chances of potential loss

Cannot affect exposure to potential loss

LACK OF INFORMATION•Inadequate•Unreliable•Unfamiliar•Unpredictable•Insufficient Time

Do not know size of potential loss

Do not know chances of potential loss

Do not know exposure to potential loss

LACK OF TIME•Must choose before uncertain event occurs

Insufficient time to understand or reduce magnitude of potential loss

Insufficient time to understand or reduce chances of potential loss

Insufficient time to understand or reduce exposure to potential loss

RELATIONSHIP BETWEEN DETERMINANTS & COMPONENTS OF RISK

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

PERSONAL RISKS FINANCIAL RISKS HEALTH RISKS

Financial Live Beyond Your Means Diseases

Psychological Lose on Investments Violence

Medical Leveraged Too High Heredity

Social/Cultural Lose Your Credit Rating Diet

Legal/Illegal Lose Assets Lack of Exercise -or- Too Much Exercise

Nature of Employment Personal Habits - Smoking

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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BUSINESS DECISIONS USUALLY INVOLVE TRADE-OFFS – THAT IMPLY DIFFERENT RISKS FOR DIFFERENT PEOPLE:

oShareholders

oPrivate Owners

oEmployees

oManagement

oConsumers

oSuppliers

---Identify three risk factors for each of the roles identified above

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• INFORMED BUSINESS START-UP OR EXPANSION DECISIONS REQUIRE ANALYSIS OF MANY DIFFERENT KINDS OF RISKS:

• MARKETPLACE RISKS• MANAGEMENT RISKS• FINANCIAL RISKS• OPERATIONAL RISKS• PRODUCTION RISKS• OTHER RISKS

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THERE ARE MANY POTENTIAL AREAS OF RISK TO BE CONSIDERED

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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Marketplace Risks:oLower than Projected Sales VolumesoCompetitive Price CuttingoPoor Location [or, location loses value]oProduct/Service ObsolescenceoConsumer Goods Life Cycle SyndromeoPotentially unfavourable Sector-Wide Trends

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• Management Risks:

oInexperienced ManagementoDeath/Loss of a Key EmployeeoLack of Decision-Making LeewayoIneffective Management – Employees Not Prepared to FollowoLack of Management Guidelines/Operating Parameters Leads to Conflict, Inefficiencies, Loss of Competitiveness

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• Financial Risks:

oOperating Capital ShortfallsoOperating Budget OverrunsoExcessive Accounts PayableoExcessive Accounts Receivable/Credit PoliciesoOver-LeveragedoCosts of CorruptionoExcessive Debt Financing Costs

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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Operational Risks:

oLack of/Poor Inventory Control SystemsoEmployee Theft/ShopliftingoProperty DamageoCustomer/Public Liability on Business PremisesoInefficient/Redundant/Unsafe Production SystemsoEnvironmentally Hazardous OperationsoUndependable Suppliers/Servers/Support Systems

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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• Production Risks:

oDelays in Production/Services Development, FinishingoExcessive R&D CostsoSupplier Delays/UnreliabilityoSpoilageoPoor Quality Control/Monitoring SystemsoFailure to Meet SchedulesoUnreliable Logistics Providers

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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Other Risks:

oGovernment RegulationsoPolitical InstabilityoExternal-Internal Business Conditions*oInclement WeatheroControlling MiddlemenoActs of God/Catastrophic EventsoCrimeoSpiralling Energy CostsoEtc.

* See Next Slide

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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• External-Internal Business Conditions*Internal Business Conditions can be largely Controlled by ManagementE.g.o Inventory Controls [Storage Space, Security Systems, Inventory Counts]o Cash Shortages/Secure and Accountable Systemso Staff Competence Levelso Policies & Procedureso Merchandising Techniques, etc.

External Business Conditions are beyond the Control of ManagementE.g.o Depressed Economyo High Unemploymento Sudden Changes in Trends/Styleso Consumer-Driven versus Producer-Driven Market Conditionso Sudden Growth in the Economy

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment TableRisk Assessment Table

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ELEMENT LOW MEDIUM HIGHIndustry Sector

Marketplace

Competitive Position

Marketing Strategy

Assumptions

Financial Capabilities

Management Capabilities

Staff Capabilities

Physical Assets

Technological Capabilities

Operational Efficiencies

Environmental Hazards

Others

OVERALL RISK ASSESSMENT:

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• Complete a Risk Assessment Worksheet with your Focus Group for the business idea your group has chosen for a business plan.

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• Look at the Attached Example of a Risk Management Strategy for the CIPSED Project --- to see the wide range of applications for this technique.

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• Complete a Risk Management Strategy with your Focus Group for the business idea your group has chosen for a business plan.

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CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• MANY BUSINESSES FAIL BECAUSE THEY SUFFER FROM A LACK OF SOUND MANAGEMENT PRACTICES, WHICH MAY BE EXHIBITED BY:oPoor Planningo Inadequate Market Analysis or KnowledgeoProduct/Services DefectsoPoor [No] Marketing StrategyoPoorly Timed/Rushed Start-UpoFailure to Anticipate the Reaction of the Competition to

Your Entry to the MarketplaceoGeneral Chaos

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Failure RISK Assessment:

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

• REDUCE THE RISK BY REMOVING/ALLEVIATING CAUSES• SHIFT THE RISK; E.g., TAKE OUT INSURANCE• ABSORB SMALL, CALCULATED RISKS• MINIMIZE RISK EXPOSURE VIA GOOD MANAGEMENT

PRACTICES AND PLANNING• STUDY MARKET CONDITIONS AND CONSUMER

BEHAVIOUR• BUY TIME THROUGH INCREASED KNOWLEDGE AND

IMPROVED BUSINESS SKILL-SETS• PRIORITIZE RISK FACTORS• GET IN CONTROL

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MANAGING RISK:

Risk Assessment/Risk Risk Assessment/Risk ManagementManagement

27CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

• Complete a Risk Assessment Worksheet for one of the following questions [this is an individual assignment]:

1. Should I start this business?

2. Should my spouse and I have another baby?

3. Should I pursue more university degrees?

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Risk Assessment/Risk ManagementRisk Assessment/Risk Management

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“Continually Identify Sources of Risk and Work to Lower Your Exposure to

Them”

MANAGING RISK: